18.5 Fringe Benefits

Note: This policy is intended for the purpose of informing University of Illinois System employees and other system-related individuals about relevant tax issues. This policy does not constitute legal or tax advice. Individuals should consult with their attorneys or tax professionals for advice on personal issues.

Note: Certain fringe benefits listed within this policy may not be provided to all or any system employees. This policy does not include all fringe benefits available to all or any system employees.

Overview 

Since the Internal Revenue Code (IRC) and Federal Treasury Regulations (Treas. Regs.) frequently change, the information contained within this policy is based on the IRC and Treas. Regs. as of January 1, 2026, unless otherwise noted.

Fringe benefits are a form of pay, including cash and non-cash compensation, such as property or services, for the performance of services given by the provider of the benefits to the recipient of the benefits. For purposes of this policy, the provider, also commonly referred to as the employer, is the University of Illinois System, and recipients, individuals performing services in connection with a fringe benefit, are referred to as employees.

According to Treas. Reg. §1.61-1, gross income is defined as all income from whatever source derived, unless specifically excluded by law. Since fringe benefits are a form of compensation, the value is generally included in an employee's gross income and is subject to income and employment tax withholding. However, as outlined under a number of IRC provisions, a number of exceptions exist where certain fringe benefits are explicitly excluded from gross income. See Fringe Benefits Excluded from Income section for additional information.

In the event that an employee pays for a portion of a benefit received, the amount by which the fair market value of the benefit is greater than the amount paid by the employee is included in the employee's gross income. Also, in certain instances the value of fringe benefits may be included in an employee's gross income even though the employee did not actually receive the benefit. For example, an organization may provide a fringe benefit to an employee's family member who does not perform services for the organization.

Due to the numerous fringe benefits available and because the tax treatment of fringe benefits can vary depending on the facts and circumstances of each situation, this policy is intended to provide a brief background of the tax treatment for fringe benefits that may be offered to employees or are applicable to the system.

Fringe Benefits Excluded from Income

The following list is comprised of several types of specific fringe benefits that may be either completely or partially excluded from an employee's gross income under provisions of the IRC:

Although several statutory exclusions are available for fringe benefits, and given that generally the value of fringe benefits is included in an employee's gross income, it is imperative to ensure adherence to all restrictions, conditions, and requirements under the IRC section where the applicable exclusion exists.

Certain Fringe Benefits

IRC §132 contains comprehensive information on certain fringe benefits and specifically excludes the following seven types of fringe benefits from an employee's gross income:

1. No-additional-cost services;
2. Qualified employee discounts;
3. Working condition fringes;
4. De minimis fringes;
5. Qualified transportation fringes;
6. On-premises gyms and other athletic facilities; and
7. Uniforms and work apparel.

IRC §132(l) states that IRC §132 shall not apply to the tax treatment of any fringe benefit that is expressly provided for by another IRC section, with the exception of subsections (e) - De Minimis Fringe and (g) - Qualified Moving Expense Reimbursement (moving expenses were suspended for taxable years beginning 2018).

1) No-Additional-Cost Services

The no-additional-cost services (NACS) exclusion (IRC §132(b)) applies to a service provided by the system to an employee if:

• The system-provided service does not require the system to incur any substantial additional costs, including labor expenses and lost revenue, and
• The service is offered on a nondiscriminatory basis to customers, students, and employees in the ordinary course of the system's line of business.

For purposes of this exclusion, "eligible system employee" means a:

• Current or retired employee,
• Widow or widower of former employee or retiree, and
• Spouse or dependent child of an employee.

Provided the aforementioned requirements are satisfied, essentially any system-provided service that is indeed a result of excess capacity (with the exception of educational services covered by other sections of the IRC) is eligible for treatment as a NACS. Departments may impose additional restrictions on eligibility for NACS benefits.

A common example of NACS includes an airline providing an employee a free standby flight (i.e., an empty seat on an airplane when boarding begins). The airline does not incur additional costs in operating expenses or foregone revenue at the time an employee on standby boards the plane. However, the NACS exclusion does not apply if an airline provides reserved flights to its employees. Treas. Reg. §1.132-2(c) provides the following example:

Assume that a commercial airline permits its employees to take personal flights on the airline at no charge and receive reserved seating. Because the system forgoes potential revenue by permitting the employees to reserve seats, employees receiving such free flights are not eligible for the no-additional-cost exclusion.

A similar situation can be applied to a university setting. An example of a NACS is providing eligible system employees with free, single-event tickets. However, reserving seats in advance presents a possibility of foregone revenue from the general public. Therefore, complimentary season tickets are not eligible for the NACS exclusion.

The system cannot incur foregone revenue or additional costs as a result of providing free tickets.  All of the following criteria must be met for the NACS exclusion to apply:

• Lost or Foregone Revenue (treated as a cost):
  • The system event must not be sold out. All reserved or held back tickets that are never available to the general public are considered sold and taxable if not paid for by an employee because potential revenue is lost.
  • Units must track the distribution of all complimentary tickets, recording the employee's name, number of free tickets, date of ticket distribution, and seat location (unless the event offers general seating). Employee identification (for example, employee signature, identification card, or electronic identification) is required when tickets are distributed. A department may impose its own requirements regarding identification and the number of days the tickets are available prior to the scheduled start of the event.
  • If an event ends up being sold out and all single-entry tickets are sold, the value of all complimentary tickets previously provided for the event must be treated as taxable income to employees who received complimentary tickets.
• Substantial Additional Costs: The system cannot incur substantial additional costs in providing the service to employees, including out of pocket costs and the cost of labor in providing the service. Additional costs do not include those that are merely incidental to the primary service being provided by the system. It is unlikely that the system will incur any substantial additional costs in connection with providing complimentary tickets.

Unless attendance at an event is for bona fide system business purposes (see Working Condition Fringes, below), the value of complimentary tickets provided to employees for guests other than those defined as eligible employees, is taxable and subject to withholding. Employees are required to inform their units if a complimentary ticket is used by an individual other than an eligible employee. For example: An employee receives four complimentary tickets (one for the employee, one for a spouse, and two for dependent children). The employee's spouse and children decide not to attend the event, so the employee gives the three tickets to a friend. The employee is now required to inform their unit that the three tickets were given to non-eligible individuals. The unit must treat the value of these tickets as taxable income to the employee and subject to withholding.

See additional helpful information and examples in the IRS Federal, State, and Local Governments Newsletter.

2) Qualified Employee Discounts

Qualified employee discounts are excluded from gross income when an employee receives the discount, whether in the form of property or services, from the system on a nondiscriminatory basis for the employee's personal use. Property discounts may not exceed the system's gross profit percentage; service discounts may not exceed 20% of the price for services offered to the general public. Employee discounts on property or services that qualify for the exclusion from gross income must be offered to the general public in the ordinary course of the system's line of business in which the employee performs substantial services.

Examples of qualified employee property and service discounts include (1) merchandise discounts at system-owned bookstores or meal discounts at system operated eating facilities, and (2) system entertainment or athletic tickets sold at discounted rates. In the preceding examples, the tax treatment is as follows: the amount of the merchandise or meals discount in excess of the system's gross profit percentage and the amount of the tickets discount exceeding 20% of the tickets' value is taxable and included in the employee's gross income on Form W-2, Wage and Tax Statement.

3) Working Condition Fringes

A working condition fringe is defined as any property or service provided to an employee by the system to the extent that, if the employee paid for the property or service, the amount paid would be allowable as a deduction under IRC §162, Trade or Business Expenses or IRC §167, Depreciation. In general, working condition fringes may be provided to current employees, but not to spouses or dependents. Also, working condition fringes generally are not subject to nondiscrimination rules.

In order for a benefit to qualify under the working condition fringe exclusion, the employee's use of system-provided property or service must be associated with the employee's employment at the system, and the employee may not be provided with the opportunity to choose between the benefit and other remuneration. In addition, the employee must meet the substantiation requirements applicable to the deduction.

Under Treas. Reg. §1.132-5(c)(1), the value of property or services provided to an employee may not be excluded from the employee's gross income as a working condition fringe, by either the system or employee, unless the applicable substantiation requirements of either IRC §274(d), Disallowance of Certain Entertainment, etc., Expenses - Substantiation Required or IRC §162, whichever is applicable, and the regulations thereunder are satisfied. The substantiation requirements of IRC §274(d) apply to an employee even if the requirements of IRC §274 do not apply to the system for deduction purposes, that is, even though the system is a tax-exempt organization and a state instrumentality (governmental unit).

The substantiation requirements of IRC §274(d) are satisfied by adequate records or sufficient evidence corroborating the employee's own statement. Therefore, such records or evidence provided by the employee, and relied upon by the system to the extent permitted by the regulations promulgated under IRC §274(d), will be sufficient to substantiate a working condition fringe exclusion. The records maintained must include the following information:

1. The amount of such expense or other item;
2. The time and place of travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift;
3. The business purpose of the expense or other item; and
4. The business relationship to the employee of persons entertained, using the facility or property, or receiving the gift.

No exclusion or deduction shall be allowed unless the above criteria are maintained in the employee's records. The system must also retain a copy of the adequate records maintained by the employee for at least four years after the date the tax becomes due or is paid, whichever is later.

Computers and Other Electronic Devices - Computers and other electronic devices are categorized as listed property under IRC §280F(d)(4), Listed Property. The substantiation requirements of IRC §274(d), as mentioned in the previous section, must be satisfied to determine the nontaxable business portion and the personal benefit, which is taxable and included in the employee's gross income on Form W-2. In the event that the substantiation requirements are not met, the entire amount, including business and personal use, is taxable and included in the employee's gross income on Form W-2.

Club Dues and Membership Fees - Generally, no deduction shall be allowed for amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or other social purpose. Examples of clubs and memberships include, but are not limited to, country clubs, golf and athletic clubs, social clubs, airline clubs, and hotel clubs. Although, club dues and membership fees may qualify under the working condition fringe exclusion if the amount is:

1. Incurred for a bona fide business purpose;
2. Allowable as a deduction under IRC §162;
3. Elected by the system for exclusion from compensation; and
4. Substantiated by the employee.

If the aforementioned criteria are met, the business portion of the amount paid or incurred by the system for an employee's club dues and membership fees is excluded from the employee's gross income. If the criteria are not met, the entire value is categorized as a personal benefit. The personal portion of club dues and membership fees is taxable and included in the employee's gross income on Form W-2.

Employer-Provided Vehicles - See the Employer-Provided Vehicles section for additional information.

Travel for Spouses, Dependents, and Guests who are Treated as Employees - In general, no deduction shall be allowed for travel expenses paid or incurred for a spouse, dependent, or guest accompanying an employee on business travel. However, travel expenses for a spouse, dependent, or guest may qualify under the working condition fringe exclusion if:

1. The spouse, dependent, or guest is:
   • A bona fide employee* of the same person or entity paying or reimbursing the travel and related expenses, and
   • Traveling for a bona fide business purpose**;
2. The expenses are allowable as a deduction under IRC §162;
3. The expenses are elected by the system for exclusion from compensation; and
4. The expenses are substantiated.

* - A bona fide employee is determined by evaluating the common law rules and analyzing three main factors, including behavioral controls, financial controls, and the relationship between the system and the individual providing services. All the facts and circumstances of each situation need to be considered. See 17.2 Classification of Independent Contractors Versus Employees, for additional information.

** - IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses , provides that for a bona fide business purpose to exist, a real business purpose for the individual's presence must be proved. See Bona Fide Business Purpose section for additional information. Incidental services, such as typing notes or entertaining, are not enough for a bona fide business purpose to exist. In addition, according to a 2002 IRS, Exempt Organizations Division, Technical Instruction Program, the courts have used the following two-step analysis to prove a bona fide business purpose: (1) the dominant purpose must serve the system's business, and (2) the spouse, dependent, or guest must actually spend a substantial amount of time assisting the accomplishment of the system's purpose.

If the aforementioned criteria are satisfied, the spouse, dependent, or guest is treated as an employee. Therefore, the travel and related expenses paid by the system are treated as working condition fringes and are excluded from taxable income. If the aforementioned criteria are not satisfied, the travel and related expenses do not qualify as working condition fringes and the amount paid or incurred is taxable and included in the employee's gross income on Form W-2.

Volunteers - For purposes of this policy, a volunteer is a spouse, dependent, or guest of an employee who, without compensation, provides services for the system. The volunteer may be providing services to support the system's mission of teaching, research, and public service, helping to promote the system, or helping in various fundraising activities.

The services may include meeting prospective students, employees, or donors, or conferring with legislators or others of the system community. The meetings may take place at various system functions including alumni gatherings, fundraising events, theatrical performances, or pre- and post-game athletic event receptions.

Under Treas. Reg. §1.132-5(r), solely for purposes of working condition fringe benefits, a bona fide volunteer* who performs services for a tax-exempt organization is deemed to have a profit motive for purposes of IRC §162. Treas. Reg. §1.132-5(r)(3)(i) provides that an individual is considered a "bona fide volunteer" if the total value of the benefits received by the volunteer is substantially less than the total value of the volunteer services provided by the volunteer. Since a volunteer providing services to a tax-exempt organization is allowed ordinary and necessary business deductions under IRC §162, benefits provided by the tax-exempt organization are excluded from the volunteer's gross income.

* - To be considered a bona fide volunteer, all the following IRS and system conditions must be met:

• Internal Revenue Service (IRS) conditions:
  • A bona fide business purpose for the travel must exist. According to IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, a bona fide business purpose exists if the employee substantiates a real business purpose for the volunteer's presence. See Bona Fide Business Purpose section for additional information. Incidental services, such as typing notes or assisting in entertaining, are not enough to treat the expenses as excludible.
  • According to a 2002 IRS, Exempt Organizations Division, Technical Instruction Program, the courts have used the following two-step analysis to prove a bona fide business purpose:
    • The volunteer's dominant purpose must serve the system's business, and
    • The volunteer must spend a substantial amount of time assisting the accomplishment of the system's purpose.
  • Federal Treasury Regulation §1.132-5(r)(3)(i) provides that the total value of the benefits received by the volunteer for the services must be substantially less than the total value of the volunteer's services provided to the system.
• System conditions:
  • The travel and related expenses must be incurred while the volunteer is providing services, such as providing services to support the system's missions, helping to promote the system, or assisting in various fundraising activities;
  • The volunteer must provide an important contribution to the success of these functions; and
  • Documentation describing the bona fide business purpose and the services of the volunteer, as well as the value of the volunteer's services, must be provided to University Payables. This documentation is maintained by University Payables. The documentation must be consistent with the (1) services rendered and (2) purpose for which the trip and resulting expenses were incurred.

4) De Minimis Fringes

De minimis fringes consist of any property, excluding cash and generally all cash equivalents, or service provided to an employee that has a value that is so minimal that accounting for it would be unreasonable or administratively impractical. Thus, the value of de minimis fringes is excluded from an employee's gross income. In order for the de minimis fringe exclusion to apply, the frequency with which the system provides each employee similar fringe benefits is taken into account. IRS rules provide that a de minimis benefit must be occasional, infrequent, and not routine. In general, the line-of-business and nondiscrimination rules do not apply to de minimis fringes. Examples of de minimis fringes include, but are not limited to, occasional typing of a personal letter by a company administrative assistant, occasional personal use of a company copy machine, occasional picnics for employees, occasional meal money or transportation fare because of overtime work, occasional tickets (excluding season tickets) to theatrical or athletic events, coffee, doughnuts, and soft drinks.

For system purposes, de minimis is generally considered any property or service with a value of less than $100.

5) Qualified Transportation Fringes

Under the qualified transportation fringe exclusion, qualified parking, subject to certain conditions and dollar limitations, are excluded from an employee's gross income.

Per IRC §132(f), qualified parking is defined as parking provided to an employee on or near the business premises of the system, or on or near a location from which the employee commutes to work by means of mass transit, in a commuter highway vehicle, or by carpool. Qualified parking does not include parking used by an employee for residential use

For calendar year 2026, the maximum exclusion for qualified parking benefits is $340 per month.

6) On-Premises Gyms and Other Athletic Facilities

IRC §132(j)(4) is a special exclusion, which provides that generally the value of free or low-cost use of on-premises athletic facilities, such as gyms, pools, tennis courts, or golf courses, provided by the system to its employees shall not be included in an employee's gross income. However, to qualify under this exclusion, the following three criteria must be met:

1. The facility must be located on the system's owned or leased premises, but is not required to be located on the system's business premises;
2. The facility must be operated by the system; and
3. Substantially all use of the facility must be by employees of the system, their spouses, or their dependent children.

For purposes of IRC §132(j)(4), the definition of an employee includes any person treated as an employee under IRC §132(h), including:

1. A current employee;
2. A retired employee;
3. A disabled employee;
4. A widow or widower of:
   • An individual who died while an employee, or
   • A former employee who retired or left on disability; or
5. A dependent child or spouse of any individual listed in items 1 - 4 above.

The on-premises athletic facilities exclusion does not apply to any athletic facility (1) available to the public through the sale of memberships, the rental of the facility, or a similar arrangement, or (2) utilized for residential use, such as a resort with accompanying athletic facilities. Moreover, nondiscrimination rules generally do not apply to the on-premises athletic facilities exclusion.

The special exclusion for athletic facilities may not apply to employees of certain educational institutions if substantially all facility use is by students. However, the value may qualify under another exclusion of the IRC, such as No-Additional-Cost Services or Qualified Employee Discounts.

7) Uniforms and Work Apparel

Clothing may be considered a taxable fringe benefit if it is not excluded by a specific section of the IRC. Allowances for clothing are always taxable.

The following two exclusions for apparel include:

1. De minimis fringe benefits where the value of the apparel is so small that accounting for it is unreasonable or administratively impracticable; and
2. Working condition fringe benefits if the clothing:
   • is required by the system or essential to the employee’s employment,
   • is not suitable for general wear or use away from work, and
   • is not worn while away from work.

The IRS's Accountable Plan Rules: Travel and Other Expense Reimbursements, Allowances, or Advances

The system follows the IRS's accountable plan rules for travel and business expense reimbursements found in Treas. Reg. §1.62-2. The accountable plan rules apply to all reimbursements, allowances, or advances to employees for travel and authorized business expenditures.

The requirements of the IRS's accountable plan rules must satisfy all of the following conditions:
 

1. A business purpose for the expenses must exist. The expenses must be in connection with performance of services as a system employee and deductible as business expenses. See Bona Fide Business Purpose section or IRS Publication 463  for additional information.
2. The employee must adequately account for expenses claimed within a reasonable time period after the expenses are paid or incurred (defined as 60 days). In accordance with Treas. Reg. §1.274-5T, this required substantiation consists of receipts, cancelled checks, or invoices that show the nature (date, time, and place) and amount of the expenditures. Expenses reimbursed under a per diem allowance method are considered substantiated without receipts.
3. If an advance is received, the employee must return amounts in excess of the substantiated expenses within a reasonable time period, preferably within 15 days, after the expenses are paid or incurred. In accordance with system policy, the excess amount must be returned within 60 days.

Amounts paid under the accountable plan rules are not taxable wages and, therefore, are not subject to payroll withholdings.

Expenses are treated as paid under a nonaccountable plan if the aforementioned rules are not met. The full amount of the reimbursement, allowance, or advance is reported as taxable wages on the employee's Form W-2 and subject to payroll withholdings.

Bona Fide Business Purpose

In accordance with IRS rules, there must be a bona fide business purpose for fringe benefits and/or reimbursed expenses to be treated as nontaxable income to employees. The determination of a bona fide business purposes is facts and circumstances specific. All expenses must be incurred for real business purposes, in connection with the performance of services as a system employee, and deductible as ordinary and necessary business expenses. The employee must have actively engaged in a substantial business meeting, negotiation, discussion, or other business transaction for the system. The employee must provide (1) adequate records or written substantiation of the bona fide business purpose or use or (2) sufficient evidence corroborating an employee's statements explaining the business purpose.

An example includes complimentary tickets to events. In this case, a real business purpose for the employee's presence must be provided. The dominant purpose must serve the system's business, and a substantial amount of time must be spent on the accomplishment of the system's purpose.

Incidental services, such as typing or assisting with entertaining is not enough to prove a bona fide business purpose. The written substantiation must include the description of business benefit gained or expected to be gained and the nature of business discussions with the individuals entertained. If complimentary tickets are used by a guest the business purpose of the guest's presence must be provided as well.

See IRS Publication 463 for additional information.

Moving Expenses

As of January 1, 2018, all personal moving expenses reimbursed to or paid on behalf of an employee by the system are reported as taxable income to the employee. Units should process moving expense reimbursements the same as other taxable fringe benefits.

When personal moving expenses are reported to University Payroll and Benefits (UPB), employees will see an increase in their taxable income and withholdings. Therefore, their net pay will be reduced for the required 22% federal, 4.95% state, and 1.45% Medicare withholdings on the moving expenses.

See 8.11 Relocation Assistance for additional information.

Gifts, Prizes, and Awards

In general, the value of gifts, prizes, and awards provided by the system to an employee is taxable and included in the employee's gross income on Form W-2 and subject to income tax and Medicare withholdings, unless excluded under (1) IRC §74 as an exception for certain employee achievement awards or certain prizes and awards transferred to charities, (2) IRC §132(e) as a de minimis fringe, or (3) IRC §117 as a qualified scholarship.

Regardless of the value, all gifts, prizes, and awards presented in the form of cash, cash equivalents, gift certificates redeemable for cash, or gift certificates/cards/coupons that are redeemable for a variety of merchandise or services, are taxable and included in the employee's gross income on Form W-2 (see 4 Payroll).

For additional information regarding gifts, prizes, and awards to individuals, see 8.1.4 Determine the Allowability of Gifts, Prizes, and Awards to Individuals.

For additional information regarding gifts, prizes, and awards to non-University of Illinois System employees, see 8 Payments and Reimbursements - Tax Implications for Payments.

For additional information regarding raffles, see 18.11 Raffle Winnings.

Employee Achievement Awards

IRC §274(j)(3) defines an employee achievement award as an item of tangible personal property, such as a watch or clock, that is: (1) transferred to an employee by reason of the employee's length of service or safety achievement, (2) awarded as part of a meaningful presentation, such as a ceremonious observance emphasizing the employee's length of service or safety achievement, and (3) awarded under conditions and circumstances that do not create a significant likelihood that the payment is disguised compensation, such as providing an award in lieu of a cash bonus.

When the previously mentioned criteria are met, the cost or fair market value (if established) of all employee achievement awards with a cumulative value of $400 or less is not taxable to the employee per calendar year. Any amount exceeding $400 during the calendar year is taxable to the employee and subject to withholding.

Length of Service Awards

IRC §274(j)(4)(b) provides that an award shall not be treated as having been provided for length of service achievement if the item is received within the employee's first five years of employment or if presented more often than once every five years.

Safety Achievement Awards

Awards are not received as nontaxable safety awards if employee safety achievement awards, excluding awards nontaxable as de minimis fringes under IRC §132(e)(1), were previously presented to more than 10% of eligible employees of the system or if such award is presented to a manager, administrator, clerical employee, or other professional employee. Eligible employees are individuals that have worked full-time for the system for a minimum of one year immediately preceding the date the safety achievement award is presented and must not be classified as an employee described in the preceding sentence.

Certain Prizes and Awards Transferred to Charities

IRC §74(b) provides an exception to exclude the value of certain prizes and awards from an employee's gross income if the employee received the prize or award in recognition of educational, scientific, artistic, literary, civic, or charitable achievement and the prize or award was transferred to a charitable organization, as defined in IRC §170(c), prior to receiving the award. In order for prizes and awards that are transferred to charities to qualify for exclusion from an employee's gross income, additional requirements must be met, which include: (1) the employee receiving the award must be selected without entering a contest, (2) the award must be for an employee's past achievement, and (3) no substantial future services may be required as a condition of receiving the prize or award.

De Minimis Gifts, Prizes, and Awards

Certain gifts, prizes, and awards may be excluded from an employee's gross income if qualified as de minimis fringes. The gifts, prizes, and awards must be of minimal value and provided to employees on an infrequent basis. See the De Minimis Fringes section for additional information.

Qualified Tuition Reduction Programs

IRC §117(d)(1) defines the term qualified tuition reduction as the amount of any reduction in tuition provided to an employee of an organization described in IRC §170(b)(1)(A)(ii) for the employee's education below the graduate level at the employing organization or any other organization described in IRC §170(b)(1)(A)(ii). An organization classified under IRC §170(b)(1)(A)(ii) is described as an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.

For purposes of IRC §117(d), the definition of an employee includes any person treated as an employee under IRC §132(h), including:

1. A current employee;
2. A retired employee;
3. A disabled employee;
4. A widow or widower of:
   • An individual who died while an employee, or
   • A former employee who retired or left on disability; or
5. A dependent child or spouse of any individual listed in items 1 - 4 above.

IRC §117(d)(3) provides that qualified tuition reductions must be provided to employees on a nondiscriminatory basis. Thus, qualified tuition reductions must be available on substantially the same terms to each member of a group of employees, defined under a reasonable classification determined by the system, which does not discriminate in favor of individuals that are officers or highly compensated employees as defined by IRC §414(q).

A qualified tuition reduction is tax-free; therefore, the value is excluded from an employee's gross income and is not subject to withholding. However, IRC §117(d) does not apply to any portion of a tuition reduction that represents payment for past, present, or future services tied directly to the tuition reduction. In this case, the tuition reduction is taxable and included in the employee's gross income on Form W-2.

IRC §117(d)(5) contains an exception from the undergraduate-only rule, which states that qualified tuition reductions provided to a graduate student at an educational organization described in IRC §170(b)(1)(A)(ii) are not included in wages if the graduate student performs teaching or research activities for the organization. The exception under IRC §117(d)(5) does not apply to any portion of a graduate level tuition reduction that represents payment for past, present, or future services tied directly to the tuition reduction. Unless the IRC §117(d)(5) exception applies or it is explicitly provided for by another section of the IRC and the requirements of such section are satisfied, any graduate level tuition reduction is taxable and included in the employee's gross income on Form W-2.

For IRC §117(d) purposes, educational organizations classified under IRC §170(b)(1)(A)(ii) that provide employees qualified tuition reductions under IRC §117(d) are not subject to IRS reporting or filing requirements. In addition, no dollar limitations are imposed on the amount that may be excluded from an employee's gross income under IRC §117(d).

Meals and Lodging Furnished for the Convenience of the Employer

All units must maintain written documentation in cases where employer-provided meals and/or lodging are requirements of an employee's position. (5 Receivables, provides additional information about lodging).

Generally, the fair market value of employer-provided meals and lodging is taxable and included in the employee's gross income on Form W-2. However, meals qualifying as de minimis fringes under IRC §132(e) are excluded from an employee's gross income. See the De Minimis Fringes section for additional information. In addition, meals and lodging provided to an employee for the convenience of the system that qualify for exclusion under IRC §119 are excluded from an employee's gross income provided the following conditions are met:

1. Meals must be:
   • Provided in kind (allowances and reimbursements do not qualify),
   • Provided for the convenience of the system (for substantial noncompensatory reasons, for example, meals furnished during working hours due to a restricted short meal period or in order for the employee to be available for emergencies), and
   • Provided on the system's business premises (a place where a significant portion of the employee's duties are performed or on the premises where a significant portion of business is conducted by the system); and
2. Lodging must be:
   • Provided in kind,
   • Provided for the convenience of the system,
   • Provided on the system's business premises, and
   • Required as a condition of employment (the employee must be required to accept the lodging in order to properly perform the assigned duties of employment, for example, an employee that is required to be available for duty at all times).

The value of meals and lodging is not excluded from an system's gross income under IRC §119 if the system provides the employee with a choice between (1) meals and lodging, and (2) other remuneration.

Qualified Campus Lodging

The fair market value of lodging provided to an employee of an educational institution as described in IRC §170(b)(1)(A)(ii) that does not meet the four lodging conditions above, may be eligible for exclusion from an employee's gross income if the requirements of qualified campus lodging are satisfied. IRC §119(d)(3) defines qualified campus lodging as lodging furnished to an employee or an employee's spouse or dependent(s) by, or on behalf of, the system for residential use. Qualified campus lodging is not included in an employee's gross income if:

1. The lodging is located on, or in the proximity of, the educational institution; and
2. The employee pays rent at least equal to the lesser of:
   • Five percent of the appraised lodging value (appraised annually by an independent appraiser), or
   • The average rent charged to individuals (other than employees or students) for comparable lodging rented by the educational institution.

If the employee does not pay rent, the lesser of five percent of the appraised lodging value or comparable rent is taxable and included in employee's gross income on Form W-2. If the employee pays rent that does not equal at least the lesser of five percent of the appraised lodging value or comparable rent, then the difference between the amount of rent paid and the lesser of five percent of the appraised lodging or comparable rent is taxable and included in the employee's gross income on Form W-2.

Meal Reimbursement for Overtime

Upon approval, occasionally units may reimburse employees for allowable extra costs incurred when requiring employees to stay on campus for evening, Saturday, Sunday, or holiday overtime work.

Generally, the fair market value of meals, meal allowances, or employer-provided meals is taxable and included in the employee's gross income on Form W-2 unless specifically excluded by another provision in the IRC. The following two exceptions exist.

Meals qualifying as de minimis fringes under IRC §132(e) are excluded from an employee's gross income. Treas. Reg. §1.132-6(d)(2) provides an exception for occasional meals and meal allowances. Meals or meal allowances provided to an employee is excluded as a de minimis fringe benefit if the benefit provided is reasonable and meets the following three requirements:

1. the benefit is provided on an occasional basis (see additional information below),
2. the benefit is provided because overtime work necessitates an extension of the employee's normal work schedule, and
3. the benefit is provided to enable the employee to work overtime (e.g., meals consumed during the period the overtime is worked).

In order to measure frequency (i.e. if the benefit is provided on an occasional basis), it is necessary to consider the provision of benefits on an employee-by-employee basis and take into consideration the availability, regularity, and routine basis with which the benefit is provided.

Another exception is found under IRC §119, Meals or Lodging furnished for the convenience of the system, which is referenced in the previous section. Meals provided to an employee for the convenience of the system that qualify for exclusion under IRC §119 are excluded from an employee's gross income provided the following conditions are met:

Meals must be:

1. Provided in kind (allowances and reimbursements do not qualify),
2. Provided for the convenience of the system (for substantial noncompensatory reasons, for example, meals furnished during working hours due to a restricted short meal period or in order for the employee to be available for emergencies), and
3. Provided on the system's business premises (a place where a significant portion of the employee's duties are performed or on the premises where a significant portion of business is conducted by the system).

Furthermore, the value of meals is not excluded from an employee's gross income under IRC §119 if the system provides the employee with a choice between (1) meals, and (2) other remuneration.

Educational Assistance Programs

IRC §127 exempts from gross income up to $5,250 per calendar year in system-provided educational assistance (including both undergraduate and graduate level education) if the system maintains its written plan. The system implemented an Educational Assistance Plan, which complies with the provisions under IRC §127. The American Taxpayer Relief Act of 2012 permanently extended this statute.

For purposes of IRC §127, Cumulative Bulletin (CB) Notice 96-68, Internal Revenue Bulletin (IRB) 1996-52, 30, (December 10, 1996) defines a graduate level course as any course taken by an employee who has a bachelor's degree or is receiving credit toward a more advanced degree if the particular course can be taken for credit by any individual in a program leading to a law, business, medical, or other advanced academic or professional degree.

An tax provision under the Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the limitation on graduate education and permanently extended the exclusion of employer-provided educational assistance (limited to $5,250 annually) under IRC §127 for undergraduate and graduate level courses. The timeframe of the coursework covered under this provision begins on January 1, 2002 and continues.

Treas. Reg. §1.127-2 defines a qualified educational assistance program as a plan established and maintained by an employer under which the employer provides its employees educational assistance.

Under IRC §127(c)(1), educational assistance is defined as (1) the system's payment of expenses incurred by or on behalf of an employee for the education of the employee, or (2) the system's provision of education to an employee. Educational assistance includes, but is not limited to, tuition, fees, books, supplies, and equipment. Educational assistance does not include payment for, or the provision of:

1. Tools or supplies that may be retained by the employee after completion of a course of instruction;
2. Meals, lodging, or transportation; or
3. Education involving sports, games, or hobbies.

For purposes of IRC §127, the definition of an employee includes:

1. A current employee;
2. A retired employee;
3. A disabled employee;
4. A laid-off employee;
5. A current employee who is on leave; or
6. An individual who is self-employed, within the meaning of IRC §401(c)(1), Qualified Pension, Profit-Sharing, and Stock Bonus Plans.

Educational assistance paid by the system for an employee under a qualified educational assistance program is excluded from an employee's gross income and is not subject to withholding. The system may provide tax-free educational assistance to employees up to the $5,250 maximum annual exclusion. Educational assistance exceeding the maximum annual exclusion is taxable and included in the employee's gross income on Form W-2. Employees should contact their personal tax advisor to determine if the educational assistance exceeding $5,250 qualifies as a tax deduction that would be adjusted for on their personal tax return.

IRC §127 does not apply to any portion of educational assistance provided to an employee that represents payment for past, present, or future services tied directly to the employer-provided educational assistance. In this instance, educational assistance is taxable and included in the employee's gross income on Form W-2.

Any amount received by an employee for educational assistance under a nonqualified program is not excluded from an employee's gross income under IRC §127. However, educational assistance offered under a nonqualified program may be excluded by another section of the IRC if the requirements of the relevant section are satisfied.

A qualified educational assistance program must satisfy several requirements under IRC §127. The provisions applicable to tax-exempt and government entities state that the qualified educational assistance program:

1. Must be a separate written plan of the system for the exclusive benefit of employees that is not part of another employee benefit plan, unless part of an IRC §125 cafeteria plan;
2. Is not required to be funded;
3. Must benefit only the system's eligible employees and does not apply to the employee's spouse or dependents;
4. Must benefit only the employees who qualify under a classification of employees determined by the system that does not discriminate in favor of highly compensated employees, as defined by IRC §414(q);
5. Does not benefit employees covered by a collective bargaining agreement if their educational assistance benefits were the subject of collective bargaining;
6. Must not provide eligible employees with a choice between educational assistance and other remuneration, which would be taxable and included in the employee's gross income on Form W-2; and
7. Must provide eligible employees reasonable notification of the availability and terms of the educational assistance program.

For additional information regarding system provided graduate level tuition and fee benefits (waivers, departmental payments, and reimbursements) and processing procedures, see UPB, Tuition and Fees: Waivers, Departmental Payments, and Reimbursements.

Employer-Provided Vehicles

Provided the recordkeeping and substantiation requirements of IRC §274(d) (see the Working Condition Fringes section for additional information) are satisfied, business use of system-provided vehicles may qualify as a nontaxable working condition fringe. Personal use of system-provided vehicles is taxable and included in the employee's gross income on Form W-2. However, de minimis personal use, such as stopping for lunch between business trips during the normal course of conducting business, is an extension of business use and is not considered personal use. Commuting does not qualify as de minimis personal use. See 15 Travel for additional information regarding pre-approved commuting use of system vehicles.

The system must use the general valuation rule or, in certain circumstances, may elect to use one of three special valuation rules provided under Treas. Reg. §1.61-21 to determine the fair market value of an employee's personal use of employer-provided vehicles. The three special valuation rules include: (1) the automobile lease valuation rule, (2) the vehicle cents-per-mile rule, and (3) the commuting valuation rule. Treas. Reg. §1.61-21(c)(3)(ii) maintains that in order to qualify for use of the special valuation rules, one of the following four (4) conditions must be satisfied:

1. The system treats the value of the benefit as wages for reporting purposes on a timely basis, which is the time for filing returns for the taxable year, including extensions, in which the benefit is provided;
2. The employee includes the value of the benefit in income on a timely basis;
3. The employee is not a control employee as described in Treas. Reg. §§ 1.61-21(f)(5) and (6), such as a highly compensated employee (compensation greater than $160,000); or
4. The system demonstrates a good faith effort to treat the benefit correctly for reporting purposes.

The system is not required to use the same special valuation rule for all system-provided vehicles. Unless another rule properly applies, once the system elects a special valuation rule, it must use the same rule for all periods for which the vehicle is provided to an employee and for tax reporting purposes for all employees who share the vehicle.

Treas. Reg. §1.61-21(e)(2) defines a vehicle as any motorized wheeled vehicle, including an automobile, that is manufactured primarily for use on public streets, roads, and highways. Treas. Reg. §1.61-21(d)(1)(ii) defines an automobile as any four-wheeled vehicle manufactured primarily for use on public streets, roads, and highways.

General Valuation Rule

Treas. Reg. §1.61-21(b)(4) provides that under the general valuation principles, the fair market value of the availability for personal use of an system-provided vehicle is taxable and included in the employee's gross income on Form W-2. For purposes of the general valuation rule, fair market value is the value an employee would be required to pay to lease the same or comparable vehicle under the same or comparable conditions. Therefore, the amount included in an employee's gross income is calculated by multiplying the employee's pre-approved commuting use percentage (the number of pre-approved commuting miles driven divided by the total number of miles driven) by the fair market value to lease the vehicle for the specified period of time.

Automobile Lease Valuation Rule

Under the automobile lease valuation rule, when a system-provided automobile is available to an employee for an entire calendar year the value of the benefit provided is the annual lease value of such automobile. For a system-provided automobile that is available to an employee for less than an entire calendar year, the prorated annual lease value or the daily lease value is used to determine the value of the benefit provided. The value calculated by using either the annual lease value, prorated annual lease value, or daily lease value is taxable and included in the employee's gross income on Form W-2.

Annual Lease Value

To calculate the annual lease value of a system-provided automobile, the fair market value of the automobile must be determined as of the first date the automobile is available to an employee for pre-approved commuting use. Treas. Reg. §1.61-21(d)(5)(ii) provides that for purposes of computing the annual lease value, the safe harbor valuation rule may be used to calculate the fair market value of the automobile. For an automobile purchased by the system at arm's length, the safe-harbor value is the system's cost, including sales tax, title, and other purchase expenses.

For a system-leased automobile, the safe-harbor value is either:

1. The manufacturer's suggested retail price less eight percent, plus sales tax, title, and other purchase expenses;
2. The manufacturer's invoice price plus four percent; or
3. The retail value reported by nationally recognized pricing guides that frequently report new or used automobile retail values.

After the fair market value of the automobile is determined, the annual lease value table provided in Treas. Reg. §1.61-21(d)(2)(iii) or in IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits is used to determine the annual lease value that corresponds to the fair market value. The taxable portion is computed by multiplying the annual lease value by the percentage of the employee's pre-approved commuting use (the number of pre-approved commuting miles driven divided by the total number of miles driven).

The fair market value of maintenance and insurance is included in the annual lease value table. However, the fair market value of fuel provided, whether provided in kind, reimbursed, or paid directly by the system, is not included in the annual lease value table. Therefore, the value of fuel for pre-approved commuting use is taxable and included in the employee's gross income on Form W-2. The fuel provided may be valued either at its fair market value or at 5.5 cents per mile for miles driven within the United States.

The system has elected to apply the automobile lease valuation rule to compute the taxable amount of pre-approved use of all system-provided automobiles. See Statement of Employer Provided Vehicle Form and 15 Travel for additional information.

Prorated Annual Lease Value

The prorated annual lease value is applied when an automobile is available to an employee for a continuous period of 30 or more days, but less than an entire calendar year. The prorated annual lease value is computed by multiplying the annual lease value by the percentage of the automobile's availability (the number of days the automobile was available divided by 365 days).

Daily Lease Value

The daily lease value is applied when an automobile is available to an employee for a continuous period of less than 30 days. The daily lease value is computed by multiplying the annual lease value by a fraction, which is calculated by four times the number of days that the automobile was available divided by 365 days. However, the system may elect to treat an automobile as being available for a continuous period of 30 days and apply the prorated annual lease value if it results in a lower valuation than applying the daily lease value.

Vehicle Cents-Per-Mile Rule

The vehicle cents-per-mile rule is calculated by multiplying the standard mileage rate by the number of pre-approved commuting miles driven. The standard (IRS) mileage rate for calendar year 2026 is 72.5 cents. However, if the system does not provide fuel, the cents-per-mile rate may be reduced by no more than 5.5 cents.

Under Treas. Reg. §1.61-21(e), the system may elect to use the vehicle cents-per-mile rule if one of the following conditions is met:

1. The vehicle is regularly used (at least 50% of annual mileage) in the system's business;
2. The vehicle is driven by employees at least 10,000 miles each year;
3. The vehicle is in a commuting pool that generally is used each workday to transport at least 3 employees to work; or
4. Use of the vehicle during the year is primarily by employees.

In addition, in situations where the vehicle is an automobile, the fair market value of the automobile may be subject to a maximum automobile value limitation, which is set annually by the IRS.

Unless the vehicle no longer qualifies for this rule, once the system elects to use the vehicle cents-per-mile rule, the rule must be used for all subsequent years. However, if the vehicle qualifies, the system may switch to the commuting valuation rule. See the Commuting Valuation Rule section for additional information.

Commuting Valuation Rule

Under Treas. Reg. §1.61-21(f), personal use for commuting can be valued at $1.50 each way, provided the following criteria are met:

1. The vehicle is owned or leased by the system;
2. The vehicle is provided to the employee for business use;
3. The system requires the employee to commute in the vehicle for valid non-compensatory business reasons;
4. The system has a written policy prohibiting personal use other than commuting or de minimis personal use;
5. The employee does not use the vehicle for personal use; and
6. The employee required to use the vehicle for commuting is not a control employee, as described under Treas. Reg. §§ 1.61-21(f)(5) and (6), such as a highly compensated employee as defined in IRC § 414(q)(1)(B) (compensation greater than $160,000).

Qualified Nonpersonal Use Vehicles

Temporary (Temp.) Treas. Reg. §1.274-5T(k)(ii) defines a qualified nonpersonal use vehicle as any vehicle that, by reason of its nature (design), is not likely to be used more than a de minimis amount for personal use. The recordkeeping and substantiation requirements of IRC §274(d) do not apply to qualified nonpersonal use vehicles. Examples of such vehicles include clearly marked police and fire vehicles, certain unmarked vehicles used by law enforcement officers, tractors and other special purpose farm vehicles, qualified specialized utility repair trucks, flatbed trucks, dump trucks, and school buses.

Temp. Treas. Reg. §1.274-5T(k)(iii) maintains that a police or fire vehicle is a vehicle that (1) is owned or leased by a governmental unit or instrumentality thereof, (2) is required to be used for commuting by a police officer or fire fighter who is on call at all times, (3) is prohibited to be used for personal reasons (other than commuting), and (4) is clearly marked, if it is apparent that the vehicle is a police or fire vehicle, by means of painted insignia or words.

Withholding on Taxable Fringe Benefits

The system uses the flat 22% supplemental withholding rate for Federal (37% if supplemental wages are over $1 million), 4.95% for State of Illinois, and, if applicable, 1.45% Medicare and 6.2% Social Security withholding on supplemental wages. As defined in IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits , the system uses the Special Accounting rule, which provides that benefits provided during the last two months of the calendar year can and will be treated as paid in the following year. Taxable benefits provided November 1st of the prior tax year through October 31st of the current tax year must be reported to UPB no later than November 30th. For additional information, see 4 Payroll.

Helpful Resources

The IRS Taxable Fringe Benefit Guide, Publication 5137 , contains helpful information regarding the taxability of fringe benefits. Contact Office of Treasury Operations, Tax for additional information: 217-244-8359.

First Published: January 2012 | Last Updated: January 2026 | Last Reviewed: April 2023